(Article originally published at www.boardmember.com)
Sustainability. Corporate responsibility. Business purpose. Social responsibility. ESG. Call it what you like, competent boards can no longer afford to put environmental, social and governance issues on the back burner.
Not long ago, these subjects—ranging from freak weather events to demands for a higher minimum wage and the diversity of board members—were widely considered to have no place on a board agenda. Now directors ignore them at their peril.
Any board member tempted to disregard or even minimize this movement would be well advised to read the proxy voting guidelines drawn up by major asset managers, or just Larry Fink’s annual letter to BlackRock shareholders from just one year ago.
Fink, BlackRock’s founder, chair and CEO, announced in 2020 that in the future, his firm, the world’s largest asset manager, would consider sustainability as a core goal in its investment decisions. “Awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance,” Fink wrote. “The evidence on climate risk is compelling investors to reassess core assumptions about modern finance.”
BlackRock’s announcement came only a few months after 180 members of the powerful U.S. Business Roundtable broke with tradition by pledging to serve not only their owners but also workers, customers, suppliers and communities. The roundtable’s original 1997 mission statement declared: “The paramount duty of management and of boards of directors is to the corporation’s stockholders.” The interests of other stakeholders, like employees or local communities, were only “relevant as a derivative of the duty to stockholders.” But from now on, it asserted: “Each of our stakeholders is essential.”
Investors and activists are watching company practices
All this is happening at the same time as modern technology is disrupting existing business models, enabling outsiders, whether investors or activists, to shine a brighter light on a company’s practices and its transparency in dealing with ESG issues.
Georg Kell, founding director of the United Nations Global Compact, notes that with help from social media and other technology, formal authority is eroding, empowering ordinary people around the world in a way that was never possible before.
As a result, it’s become more difficult for established authorities, including business leaders, to filter their messages or hide information they would prefer outsiders not to know about. Kell sees these developments as “no longer a question of communications or CEO nice talk, or just saying the right thing, but it has become a material, substantive issue for survival and growth.”
A company’s word must match its actions
Too often in the past, a company’s strong words on ESG issues have not been matched by its actions, and calls have grown for a greater measure of accountability.
In this respect, Larry Fink’s letter should be a wake-up call for boards to ensure they have the insight and information needed for proactive oversight of sustainability risks, opportunities and disclosures. Fink’s letter included this paragraph:
Where we feel companies and boards are not producing effective sustainability disclosures or implementing frameworks for managing these issues, we will hold board members accountable. Given the groundwork we have already laid engaging on disclosure, and the growing investment risks surrounding sustainability, we will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.
A board must ask these four questions
As a first step toward bringing investors like BlackRock onside, boards should seek answers from management to four simple questions:
Q1: In the coming years, will our customers and employees care more or less than they do today about the environmental and social impact of the company’s products and actions?
Insight: The board should expect that customers and employees will care more. The board should question what management believes the key stakeholders will expect from the company’s future products and actions.
Q2: Is the company currently making the most money from products that are solving environmental and social problems—or from products that are contributing to those problems?
Insight: This ratio will inform the board if, or how fast, a transition is needed.
Q3: What are the risks and opportunities for attracting and retaining talent with our current business strategy?
Insight: The answer will determine if the strategy needs to be revisited.
Q4: What are the potential ESG and climate transition risks and opportunities for the company in the short, medium and long run?
Insight: The response should form a good basis for a strategic discussion.
Outside advisory bodies can assist with ESG obligations
Many boards, especially of larger companies, have found that an outside advisory body can be a valuable resource in helping them come to grips with their ESG obligations. The best advisory groups typically comprise experts in various fields, not necessarily directly related to the company’s business.
For example, Volkswagen’s “sustainability council,” established in 2016, includes the co-director of the Potsdam Institute for Climate Impact Research; the CEO of Systembolaget, a Swedish chain of liquor stores; a former president of the European Green faction in the European Parliament; a former EU commissioner for climate action; the founding director of U.N. Global Compact; a public policy expert at the Hong Kong University of Science and Technology; and the co-chair of the WHO/World Bank Global Preparedness Monitoring Board.
Advisory boards, however, are only useful when the directors and senior management are willing to make a serious commitment in time and engagement with its members. The best ones have a direct link to the company’s formal governance structure so that the board of directors has a defined way to receive external input on matters beyond its own members’ expertise.
Even so, ultimate responsibility must lie with the directors themselves. Is your board ready for this challenge?Back To News & Views